The great depression was a watershed in monetary policy and central banking

University of Essex
Department of Economics
Dr. Sheri Markose

EC248 Monetary Innovations and Central Banks
Term Paper 2001 – 02

- “The Great Depression was a watershed in monetary policy and central banking”. Discuss.

Introduction:
The Great Depression was the worst economic crisis ever in United States history. The depression began in 1929 and lasted for about a decade. The maincause for the Great Depression was the combination of the greatly unequal distribution of wealth in the 1920s, and the extensive stock market speculation that took place during the latter part that same decade.
The bad distribution of wealth in the 1920’s existed on many levels. Money was distributed disparately between the rich and the middle – class, between industry and agriculture within theUnited States, and between the United States and Europe. This imbalance of wealth created an unstable economy. The excessive speculation in the late 1920’s kept the stock market artificially high, but lead to large market crashes. These crashes, combines with the bad distribution of wealth, caused the American economy crisis.
When the Federal Reserve Board changed its policy of easy money, theproblems in the stock market started. Banks which had extended loans to brokers began to recall their money. The brokers, who had sold most of their stock on margin, were in trouble so they asked for more money from their clients. Many of the clients were unable to pay more money and lost their stocks. Then , the brokers were forced to sell the stocks. This coupled with the recession, causedthe prices of stocks to plummet. Everyone was selling their stocks at any price to avoid lose money. On October 29, 1929, the stock market crashed.
When the farmers ran into trouble, the rural banks were not far behind. Because banks were the primary lenders to the indebted farmers, so they suffered when the farmers suffered. This led to panic throughout the worldwide banking system.President Roosevelt did everything he possibly could to fight the economy, more than his predecessor ( Bretton Woods ). He did his best to destroy the integrity of the dollar, injecting more money and then devaluating it. Roosevelt was completely unlike his predecessor. He believed the only way out of the depression was for the government to spend money. Roosevelt started a lot of public works projects.He set minimum wages and conditions and maximum working hours, making it tough on businesses.
Speculations and the problem in the stock market acted as a trigger to the already unstable U.S. economy. The rich stopped spending on luxury items, and slowed investments. The middle – class and poor stopped buying things with installment credit for fear of loosing their jobs, and not being able topay the interest. To protect the nation’s businesses the U.S. imposed higher trade barriers. Foreigners stopped buying American products. More jobs were lost, more stores were closed, more banks went under, and more factories closed. After this, The Great Depression had begun.

Was The Great Depression a watershed ?
The Great Depression of the 1930s was a watershed for both economic thought andeconomic policymaking. It led to the belief that market economies are inherently unstable. It helped change views on the efficacy of stabilization policy, bank regulation, and government social programs. Its impact on conventional economic wisdom is still apparent these days.
Under the gold standard before 1914, exchange stability was the most important goal of monetary policy and domesticobjectives were not . Thus, the monetary regime was consistent with considerable international capital mobility. “The Great Depression discredited gold-standard orthodoxy, propelled Keynesian economics to intellectual ascendancy, and, worldwide, solidified the already vocal political constituencies favoring high employment and government intervention over laissez-faire.”[1] The result was a...